Wednesday, November 11, 2015

Video Raises Doubts over Flotek's Most Recent Statements

Flotek (NYSE:FTK) put out an SEC filing in which they admitted the substantial points in my last blog post. The data that they presented proving the efficacy of FracMax was inconsistent with the official data at the Texas Railroad Commission and wrong.

They argued that FracMax and their "complex nano-fluid" [CnF] worked nonetheless.

They however denied one suggestion in my original post. Flotek had long said that FracMax - an oil-field-database iPad app was a key to their sales success. However the iPad app crashed two iPads and clearly did not perform its stated function.

Here is what Flotek said in the SEC filing.

A final assertion made in the report claims that attempts to download FracMax® for personal use resulted in iPad malfunctions and no success in obtaining an operating version of the software application. The author concludes that the program does not operate properly.

As the Company has consistently noted since inception, FracMax® is a proprietary software application for the exclusive internal use of Flotek employees. While the Company is preparing to release a new version of the software available for use by operators, FracMax® is not currently available outside of Flotek employees. A key code as well as other security requirements are necessary to obtain a working copy of the FracMax® application. This has been a consistent policy since FracMax® was introduced in 2014.

In other words they stated that there is no version of FracMax available to people who are not FloTek employees.Here is a video that Flotek presented on their investment day in September.

This video ends with a long claim for the benefit of FracMax. To quote:

Now US and National Oil Companies can license a versions of the application customised to them on a FracMax centric Apple iPad which offers the ability to import specific reservoir and production software outputs for individual wells. Its associated FracMax Halo Technology enables selection of unique data fields for the particular user.

With the Flotek FracMax app hundreds of hours worth of detailed and potentially expensive return on investment analysis is available with the touch of a screen.

Its more impactful and convenient than ever to experience the real world benefit of CnF, an innovation that is revolutionising an industry by truly making a difference.

You can touch it, you can see it, and now you can believe it. Your data has become intelligent in a way never imagined.

The future is here.

This version of FracMax is clearly available to non-Flotek employees.

I hope that Flotek can show us at least one modified version of FracMax useable by third parties. Or they can somehow explain away that video.

Or otherwise it is simple.

There is a major misrepresentation with likely severe legal ramifications.

The apple programme for the sort of distribution they're describing, I.e. To specific business customers/partners, is described here:

https://developer.apple.com/programs/volume/b2b/

It's quite possible that they really do have an app in this programme. Why they also have that borked app in the public App Store is unclear. As noted previously, the app does seem to have the Unity 3D engine inside it and a lot of "assets". My guess is that it is supposed to play a 3D promo much like what you see in the video linked in this post, or something.

The video is interesting as it does show a lot of captured material from the alleged app. My feeling is that it would be hard to fake that. Of course the actual numbers could be fake, but all that user interface stuff is probably real. I conclude that they probably do really have an app.

One problem with their business model is that they usually market directly to the pressure pumping companies who in turn around and market the data provided by FTK to the end customer and the operator.

I know FTK is working on changing this strategy from their comments in their previous quarterly reports about marketing directly to operators and by-passing the pressure pumping companies, but the switch is in its infancy.

If the data ends up being fraudulent then there is tremendous risk exposure for the service companies that market the product to their operator customers. Albeit a small pressure pumping would not have as much exposure and risk on this issue, but a larger pressure pumping company like that of the Halliburton and/or C&J would have way more exposure and risk in pumping a chemical under scrutiny with the cloud of uncertainty floating around the validity of the supporting data especially if there is any question of data manipulation.

These larger pressure pumping customers likely constitute a substantial percentage of revenue of FTK and if they elect to start sitting on the sidelines until the technology benefit is resolved then that will have an immediate and significant impact on FTK sales. No major pressure pumping company would want to promote and pump a frac chemical that ends up being exposed as fraudulent in its efficacy ( and that where is at the moment).

When in doubt abstinence is the practical path.

If the reduction in secondary marketing starts to manifest itself, look for sales to drop dramatically over the next 3 to 6 months. Their largest customers the service companies buy the product because it allows them to turn around and market the technology to their end customers at greatly inflated margins over conventional surfactant packages so the pressure pumping companies generally have a huge economic incentive in seeing the results and impact of the complex nano fluids remain on the high side. Everyone makes money in the food chain except the operator.

This is why service companies who market the product will continue to promote the product to their operators even though the product might not work from a statistically significant and scientific standpoint. In short it is purely good marketing, and there is nothing wrong with good marketing. Except when iota evolves into fraud.

Case in point. Selling ice to an Eskimos is actually legal. Selling ice to an Eskimo and presenting the data in such a way as to say the ice is better than what he already has access to, and this "nano ice" will lengthen his life span. That is where marketing stops to be marketing and enters the realm of fraud.

The technology is built off the black box concept. It is critical for the company to become more transparent in wells the technology has already pumped on so independent technical experts can independently validate the effects of the product against offset well data.

I just hope that the positive feedback from operators is based on real production data and was not influenced from gifts, trips, sporting tickets and dinners by FTK sales reps which is still a common practice across the oil and gas industry by numerous service companies.

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